Homework 7—MGT302 1. You are saving for retirement and you come across the following table. It shows the percentage of your current salary that you should save for your retirement in order to maintain the same level of consumption spending both before and after retirement. It assumes that your annual salary will remain constant in real terms until retirement, and that you will live for 25 years after retiring. For instance, if you have 35 years left before you retire and earn 3.5% per year on your investment, then you should save 19.82% of your current salary. Fill in the missing numbers in the table A. Table A Saving to maintain lifetime consumption spending Real interest rate Years to retirement 15 25 35 3.5% per annum ? ? 19.82% 4.5% per annum ? ? ? 2. You are taken a product management position within a major consumer goods firm after graduation. The contract is for four years and your compensation package is as follows: ? $5000 relocation expense ? $55,000 annual salary ? $10,000 bonus if annual goals are met ? $15,000 additional bonus at the end of four years if your team achieves a given market share You are confident in your abilities and assume there is a 65% chance in receiving each annual bonus and a 75% chance in receiving the fourth year additional bonus. The effective annual interest rate is 8.5%. What is the net present value of your compensation package? 3. Your firm is considering two investment projects with the following pattern of expected future net after-tax cash flows. The appropriate cost of capital for both projects is 10%. Year 0 1 2 3 4 5 Project A -$10 $1 $2 $3 $4 $5 Project B -$10 $5 $4 $3 $2 $1 a. Which project is better? b. Find the internal rate of return (real rate of return) of two projects and decide which one is better. c. Use Excel to draw the graph of net present value and interest rate which is shown in lecture slides. The only difference is that there are two curves in the graph. 4. Hu’s Software Design, Inc is considering the...
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